Italy: Monti government unveils further budget cuts amid rating downgrade
July 30, 2012
On 6 July, the Italian government approved further budget cuts of EUR 26 billion over the next three years. The Monti administration hopes to restore confidence in the sustainability of the country's finances, amid fears that Italy could be forced to request a bailout from its Euro area peers in the coming months. The bill includes, among other measures, a reduction in the number of provincial governments, which will be cut by half. In addition, the number of public sector workers will be reduced by 10% and the number of state managers cut by 20%. Although the impact of the budget cuts is to be spread over the next three years, the bulk of the reductions are planned for 2013 (EUR 10.5 billion) and 2014 (EUR 11.0 billion). The package also postpones the VAT increase previously envisaged for October, which will be now delayed until July next year. Despite the additional fiscal consolidation efforts, the spread between Italian and German 10-year bonds continued to widen during the month, reaching 543 points on 24 July, the highest risk premium since Monti took office in November last year. In spite of the austerity measures, on 13 July, the international credit rating agency Moody's downgraded Italy's sovereign rating by two notches, to Baa2 from A3, citing contagion risks from Greece and Spain, as well as a deteriorating economic outlook. Later in the month, on 27 July, Moody's also cut the rating for the southern region of Sicily to Baa3 from Baa2, just one level above junk status, while warning of the possibility of further downgrades going forward. A few days earlier, Prime Minister Monti had announced an austerity plan for the region aimed at restoring financial stability and reducing the risk of insolvency on Sicily's EUR 5.3 billion debt. The program will be closely monitored by the government and will focus on downsizing the traditionally-overstaffed public sector payroll.
Author: Armando Ciccarelli, Head of Data Solutions